It would take R69 billion to close South Africa’s pensions gap, assuming a contribution rate of 10%, according to research published by Andrew Donaldson, senior research associate at the Southern African Labour and Research Unit (Saldru) at UCT.
Donaldson’s research is the first of a three-part series on a universal social security fund.
“If we are to assess the financial implications and impact of broadening contributory retirement fund membership, we need to know the size of the current gap in coverage,” Donaldson wrote.
The next two papers will look at the cost of a social security fund and how it might be paid for. Donaldson was a deputy director-general at National Treasury from 2001 to 2017.
The key take-aways from Donaldson’s research are:
- About 90% of taxpayers below the age whose gross incomes exceed R350 000 a year contribute to a retirement fund.
- 79% of taxpayers whose incomes are above the personal tax threshold contribute to a fund.
- The average contribution rate, as a percentage of gross income, is 12.1%.
- There are 9.4 million people, or 57.3% of employees, who do not contribute to a retirement fund.
- Pension coverage is 16.8% for employees who earn below the tax threshold.
- Nearly a quarter of workers earning between R45 000 and R90 000 a year contribute to a retirement fund.
- About 1.5 million individuals who earn more than the tax threshold do not contribute to a retirement fund.
The tables below provide a breakdown of what Donaldson’s research uncovered in terms of the demographics and value of retirement fund contributions.
Table 1 is based on 2017 tax returns, adjusted for lags in assessment and raised to 2021 prices and the 2021/22 tax brackets. The data excludes people over 65 from the taxpayer numbers.
Donaldson says there are probably more than 6 847 000 contributors to retirement funds, because there might be contributors who are not on the Sars register. “Industry records show considerably higher numbers of clients, though these include duplicate or multiple fund involvement by some individuals,” he says.
The research’s estimates of the overall earnings distribution use QLFS earnings data for 2018 adjusted to yield aggregate earnings consistent with the national accounts. The adjusted QLFS earnings distribution generates a total number of earners above the tax threshold of slightly more than 7 million.
Donaldson’s research assumes that about 400 000 employers or self-employed taxpayers are retirement fund contributors. This would bring the total number of contributors before the impact of Covid-19 to about 7 million.
Table 2 shows the estimated distribution of contributors and non-contributors among all employed people aged 15 to 64. The table uses the tax-based data in Table 1 and the QLFS employment and earnings estimates for the first quarter of 2020.
Table 3 shows the shortfall in retirement fund contributions by value. The estimated shortfalls are based on a minimum contribution rate of 10% of the earnings of non-contributors.
Donaldson concludes: “South Africa has high rates of participation of earners in the top half of the earnings distribution in occupational or voluntary retirement fund plans. This reflects the effect of tax-deductibility in encouraging fund membership, and the effect of bargaining council or employer-provided pension fund rules that mandate participation by employees. However, many contributors withdraw their savings before retirement, on termination or changes in employment, and may as a result reach retirement age without an adequate level of accumulated savings.
“For this reason, mandatory preservation is widely seen as a desirable goal of retirement policy, linked to the continuation of tax-privileged contributions. But this cannot realistically be achieved without a substantial enhancement of income support for the unemployed, and without fiscal assistance for retirement fund membership below the tax threshold.”
Treasury asks Saldru to investigate grants
It is probably worthwhile keeping an eye on the research that comes out of Saldru, as it could provide an indication of how Treasury will address the call for a comprehensive social welfare system.
On 15 September, Dr Mark Blecher, Chief director: Health and Social Development at National Treasury, told Parliament’s Select Committee on Appropriations that Treasury had asked Saldru to investigate what it would cost to close (entirely or by 80%) the poverty gap – that is, people living below the food poverty line (R624 a month). Saldru has been asked to evaluate four or five different options, including:
- Continuing the Special Relief of Distress (SRD) grant of R350 a month after March 2022.
- A basic income grant, which Belcher described as “a bigger version” of the SRD grant.
- Brazil’s Bolsa Familia grant, a family/household grant that goes to the poorest households or families.
- Extending the Presidential Employment Programme.
- A job-seeker’s allowance, which could be linked to the employment programme.
Blecher said the different options would be modelled to determine which was the most efficient.
